Why is cryptocurrency is not the future

We should start by noting that cryptocurrency doesn't scale well because each node in the network has to process every transaction. Not only do they have to process their own transaction but they also have to process everyone else's too.

The obvious way to scale cryptocurrencies is making the network bigger - adding more nodes, right? Well, the first problem with this idea is that adding more nodes increases the level of coordination required for a transaction to go through. If you increase the number of nodes in a network by 100x, it decreases the likelihood that any two nodes have any overlap in their dispute resolution sets by 100x. This means you're going to need 10,000 high-quality and reliable dispute resolution firms to achieve the same level of security, which seems unlikely.

In a decentralised system, there isn't an obvious way for anyone to be able to afford to pay these high costs for dispute resolution. Further, if we are talking about a system that scales up, then the coordination cost of running a network increases with coordination cost proportional to N² where N is the number of participants.

Decentralization. Cryptocurrency's primary claim to fame is its decentralization. The idea is that a payment network doesn't require a trusted intermediary to process transactions, because the network itself is self-policing. In a decentralized network, transactions are confirmed by nodes in the network and recorded in an immutable distributed ledger. Proponents of cryptocurrency argue that trust is no longer required for payment processing, and the whole world will become more democratic as a result.

It is sometimes hard to remember that cryptocurrency is just a technology. It is a new way to store and transmit value. Like all technologies it has advantages and disadvantages and there are good uses of it and bad ones.

Cryptocurrencies are a poor storage of value because they are so volatile. You might think that this is an advantage – if you bought a cryptocurrency for $1,000 and then 10 minutes later sold it for $1,200 then you have made 20% on your investment. That is true, but you have also lost 20% along the way on every other day you owned it. The fact that crypto prices swing so wildly makes it pretty useless as a long-term store of value.

It is in fact so volatile that it is hard to even use it as a medium of exchange. No one wants to spend something that might be worth half as much the next day.

The volatility of cryptocurrencies makes them pretty useless as payments systems too. Say I want to buy a sandwich from a street vendor using my crypto holding. The vendor wants to be sure that they get my money and I get the sandwich, so they will want some kind of confirmation – probably written – that I am going to pay before they give me the sandwich and take the risk that I will walk off without paying them. Because of the volatility, I am never going to be able to get that confirmation without paying a big premium in any cryptocurrency transaction.

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